KEY INVESTMENT HIGHLIGHTS

• 4QFY20 normalised earnings increased +24.3%yoy to RM181.3m, due to higher contribution all business sectors
• Full year FY20 normalised earnings surged by +83.3%yoy to RM728.8m, in-line with our expectations
• Resurgence of Covid-19 worldwide could negatively impact the performance of the manufacturing segment
• On the local front, property sales expect to remain tepid due to uncertainty over the Covid-19 pandemic
• Maintain Neutral with a revised TP of RM22.88

Higher contribution across business segment. Kuala Lumpur Kepong Bhd’s (KLK) 4QFY20 normalised earnings came in at RM181.3m (+24.3%yoy). This was driven by high contribution across all its business sectors, especially the plantation segment. Better 4QFY20 profit led to fully year FY20 normalised earnings of RM728.8m (+22.3%yoy). All in, KLK’s FY20 financial performance came in within ours but below consensus expectations, accounting for 96.7% and 87.8% of full year FY20 earnings estimates respectively.

Plantations. FY20 segment profit improved significantly +83.3%yoy to RM752.2m. This was primarily attributable to favourable CPO and PK price at RM2,344/mt (vs: FY19: RM1,924/mt) and RM1,374/mt (vs: FU19: RM1,210/mt) as well as improved profits from processing and trading operations. However, we noted that FFB production declined by -4.3%yoy to 3.9m mt.

Manufacturing. The manufacturing segment FY20 profit increased by +4.6%yoy to RM403.3m which mainly stemmed from the oleochemical division (+4.8%yoy). The higher profit was mainly contributed by expansion in profit margins from the Malaysia and Europe operations. This was despite a -6.4%yoy decline in revenue to RM8.2b as a result of lower sale volume.

Property development. The property segment’s profit expanded by +14.1%yoy to RM54.0m. This was led by recognition of profit from projects with better margins. Nonetheless, revenue fell -9.1%yoy to RM154.9m.

Impact to earnings. No change to our earnings estimate at this juncture.

Target Price. We roll forward our valuation base year to FY22 and derived a new target price of RM22.88 (previously RM21.15) This is premised on pegging FY22 EPS of 85.7sen against unchanged forward PER of 26.7x. Our target PER is the group’s one standard deviation above the two-year historical average.

Maintain NEUTRAL. The strong recovery in CPO price had bided well for the group. This would be further supported by the anticipation of higher FFB growth, especially subsequent to the acquisition of brownfield oil palm plantations from TSH Resources Bhd which is expected to be completed in 1QCY21. However, with resurgence of Covid-19 cases worldwide, we view that the performance of the manufacturing division could be negatively impacted. Also, we expect recovery in property sales could be affected by the re-imposition of CMCO. Couple with more stringent bank requirement, we anticipate lower conversion of bookings into sales. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 19 Nov 2020